What we also discovered in putting the list together was that in some instances, it became impossible to separate the captain from the team. This year’s D100 is a case in point: Our editors and board of advisors were nearly unanimous in our selection of President Barack Obama as this year’s most powerful corporate governance influence. And yet, to do justice to the seismic shift his policies have brought about in the boardroom, we also had to recognize the many other  “New Voices” in the Administration who are now leading the greatest financial reform of American business since the 1930s.

So, we ask that in the pages ahead you pay more attention to who counts, and less to how we count, in arriving at our final selection of individuals and institutions that have met the requirement to be “most influential.” We think you’ll agree it’s an intricate and impressive mosaic where the whole equals much more than the sum of its parts, which may or may not be greater than 100.

Regulators & Rulemakers

Team Obama
It is often written that reasonable people may disagree, and with Americans and their Presidents, it is practically a way of life. But even an unreasonable person could only conclude that this President and his Administration are having a profound and lasting influence over the boardroom. President Barack Obama has demonstrated an enormous capacity for calm in uncertain times. His relative youth leads to frequent comparisons to John F. Kennedy and his communications skills to those of Ronald Reagan. But it is his aggressive response to the unparalleled economic challenges that greeted him at the dawn of his young presidency that harkens back to an earlier figure of towering influence,  Franklin D. Roosevelt.

FDR’s massive social and financial reform programs—the creation of Social Security as part of the New Deal, the establishment of the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Company (FDIC)—helped restore confidence in the nation’s banking system coming out of the Great Depression. One could plausibly take major portions of FDR’s New Deal and substitute his name with President Obama’s.  The implementation of the $787-billion American Economic Recovery Act one month after Obama took office, coupled with his handling of the Troubled Asset Relief Program (TARP), which sought to strengthen the financial sector by buying up the assets and equity from troubled banks, has clearly helped the nation avoid further financial disaster and put the economy on the path to recovery.

And finally, turning again to the FDR playbook, Obama assembled a team of wise men and women, formidable economic and business minds, whose decisions are having a lasting effect on the role of the corporate director. Preeminent among them was the choice of Rahm Emanuel as chief of staff. Described as a veritable “influence machine,” within the Administration and Congress, the former Congressman from Obama’s home state of Illinois is known as a hard-charging, brutally candid, sometimes combative, acutely intelligent man who can get things done and knows the ways of the Capitol and the boardroom.

The Enforcers
Perhaps second only to Obama in terms of her influence on boards and corporate governance, career regulator Mary Schapiro heads up the 75-year-old SEC. Before the crisis, the agency’s very existence was in question: “Obsolete,” “out of touch,” and “behind the times” were just some of the many terms uttered by detractors. The Commission, under former chairman Christopher Cox, was pilloried for missing the Madoff scandal.

As former SEC chairman and Directorship 100 Hall of Famer, Arthur Levitt described her: “She has the skills, the intellect, and the character to be a superb SEC chair.” But Schapiro will face a new kind of challenge in the role, not just that of proving her own qualifications, but also instituting a significant remodeling of the SEC itself, as she works to bring it into the new regulatory era.

Moving swiftly to address regulatory concerns in the wake of the financial crisis, the SEC has rolled out a series of proposals that could embody the biggest change to the rules of the game for directors in some time. Schapiro, who is no stranger to the boardroom, having served on the boards of Duke Energy and Kraft Foods, has overseen proposed rule changes on proxy access, broker voting, say on pay, and new requirements for disclosure on executive compensation and director qualifications. It’s now up to her and fellow commissioners Kathleen Casey, Elisse Walter, Luis Aguilar, and Troy Paredes to determine the final regulations that emerge from the proposals.

Other key players Schapiro has brought into the SEC include Senior Advisor Kayla Gillan, Chief Accountant James Kroeker, and Director of Enforcement Robert Khuzami. Gillan was a founding board member of the Public Company Accounting Oversight Board (PCAOB) and former general counsel to CalPERS. Kroeker joined the SEC as deputy chief accountant in 2007 from Deloitte and Touche where he had been a partner in the firm’s national accounting services group. Kroeker recently said that the proposed road map for the convergence of International Financial Reporting Standards,pushed to the back burner amid the larger issues of market reform, would be restored as another top priority. Khuzami is a former federal prosecutor, has pledged to improve the SEC’s enforcement performance by creating specialized units to provide “structure and resources for staff to ‘get smart’ about certain products, markets, regulatory regimes, practices and transactions.”

TARP Overseers
Another example of Obama’s preference for brains over politics was his reappointment of Sheila Bair to chair the FDIC. Another fiscally conservative Republican, on Bair’s watch alone this year, 94 banks have failed, creating a new challenge:  how to replenish the fund. Bair has also been an integral part of the team overseeing TARP. Neil Barofsky is a former New York assistant attorney general confirmed by the Senate in December as special inspector general. Dubbed the “TARP Cop,” his job is to figure out how and where the $700-billion TARP funds are spent, reporting directly to the President and providing updates to the Congressional Oversight Panel chaired by bankruptcy expert and Harvard Law School professor, Elizabeth Warren. COP’s first report, released in February, casti-  gated then-Treasury Secretary Henry Paulson for his performance and lack of transparency, reporting that the Treasury Department  had overpaid by $78 billion for the assets it bought from banks.

Interestingly, while Obama sponsored and was a strong proponent of  “say on pay” legislation while a senator, since appointing Kenneth Feinberg special master of compensation, he has appeared unwilling to make the issue a top priority. Feinberg, who has immersed himself in some of the country’s most troublesome and high-profile cases, is considered a superb choice, both in terms of skill and temperament, by Capitol Hill insiders. His most noteworthy case was the 33 months of pro-bono work he did following the 2001 terrorist attacks to determine how much each victim would receive from the federal government’s September 11th Victim Compensation Fund.

Feinberg may in fact be perfectly suited for a job that most compensation specialists see as thankless, and possibly as a “no win” situation. As the Obama Administration’s comp expert, Feinberg was called on to monitor the compensation of executives in what were once some of America’s most prestigious corporations, now TARP recipients, including American International Group (AIG), Bank of America, Citibank, Chrysler, GMAC, and General Motors.

Fed to the Rescue
To prevent American capitalism from spiraling deeper into the abyss, nine months after President Obama made his first Cabinet announcement, he re-nominated Ben Bernanke as Federal Reserve chairman. The former Princeton economics professor was selected by Bush in 2005 to succeed Alan Greenspan. In 2008 after the market crashed, Bernanke invoked emergency powers, slashed interest rates, and spent trillions of dollars to right the financial system. Just last month, he declared the recession “likely over.” Though he seldom gives interviews, Bernanke is never far from the public eye and has been a stalwart in the transition between presidential administrations and in the effort to stem the economic slide.

When then President-elect Obama named his economics team, it included players who, like Bernanke, were already steeped in the crisis details, demonstrated a studied understanding of Depression-era economics, or some combination of both. Enter Treasury Secretary Timothy Geithner and Chief White House Economic Advisor Lawrence H. Summers. Geithner, who is currently pushing legislation to provide more systematic regulation of financial institutions, including new limits on executive compensation, recently told one interviewer that he is optimistic major reforms will be passed.

Prior to his appointment replacing Henry Paulson, Geithner was president of the Federal Reserve Bank of New York and part of the team central to the critical negotiations that resulted in Bear Stearns being tucked into JPMorgan Chase, Merrill Lynch going to Bank of America, Lehman Bros. disappearing, and Citigroup and other struggling banks getting a lifeline.

Summers, the former Harvard University economist who became its president following his tenure as Treasury Secretary to President Clinton, is director of the Cabinet’s National Economic Council. The group was established in 1993 to coordinate and ensure that the President’s economic policy agenda is carried out.

Rounding out the team, Paul Volcker, the former Fed chief under Clinton, was selected to chair the president’s economic recovery advisory board. And Christina Romer, a former UC Berkeley economist, who administration sources suggest is well- regarded by both parties, chairs the Council of Economic Advisers. Her appointment was seen as a further triumph of brain over politics in Obama’s approach to talent recruitment.

“Short-termism must be addressed as a conceptual whole — piecemeal approaches do not work,” said Judith Samuelson, executive director of the Aspen Institute’s Business & Society Program. “Now is the time for bold ideas to drive change in the incentives and behaviors critical to transformation of how value is created and sustained.”

Institutional investors have a louder voice and corporate governance experts are asking that they promote investment policies that will promote long-term health of capital markets and public policies that encourage business managers and boards to focus on sustainable value instead of short-term, short-lived gains.

Some short-termism problems:

• First, high rates of portfolio turnover harm ultimate investors’ returns, since the costs associated with frequent trading can significantly erode gains.

• Second, fund managers with a primary focus on short-term trading gains have little reason to care about long-term corporate performance or externalities, and so are unlikely to exercise a positive role in promoting corporate policies, including appropriate proxy voting and corporate governance policies, that are beneficial and sustainable in the long-term.Risk-taking is an essential underpinning of our capitalist system, but the consequences to the corporation, and the economy, of high-risk strategies designed exclusively to produce high returns in the short-run is evident in recent market failures.

• Third, the focus of some short-term investors on quarterly earnings and other short-term metrics can harm the interests of shareholders seeking long-term growth and sustainable earnings, if managers and boards pursue strategies simply to satisfy those short-term investors. This, in turn, may put a corporation’s future at risk.

Shareholder power is likely to grow as Securities Exchange Commission Chairman Mary Schapiro continually calls for greater transparency between shareholders and their boards/management teams.

Signatories to the statement: “Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management,” include:

John C. Bogle, founder, The Vanguard Group

Warren E. Buffett, CEO, Berkshire Hathaway

James S. Crown, president, Henry Crown and Company

Lester Crown, chairman, Henry Crown and Company

Steven A. Denning, chairman, General Atlantic

Jack Ehnes, CEO, CalSTRS

J. Michael Farren, former general counsel and corporate secretary, Xerox

Margaret M. Foran, governance expert

Barbara Hackman Franklin, chairman, National Association of Corporate Directors and former United States Secretary of Commerce

Bill George, professor of management practice at the Harvard Business School and former chairman and CEO, Medtronic

Louis V. Gerstner, Jr, retired chairman and CEO, IBM

David H. Langstaff, founder and former CEO, Veridian

Martin Lipton, partner, Wachtell, Lipton, Rosen & Katz

Jay W. Lorsch, Louis Kirstein Professor of Human Relations at the Harvard Business School

Ira Millstein, senior associate dean for corporate governance, Yale School of Management and senior partner, Weil, Gotshal & Manges

John F. Olson, senior partner, Gibson, Dunn & Crutcher and distinguished visitor from practice, Georgetown University Law Center

Peter G. Peterson, chairman and founder, Peter G. Peterson Foundation

James E. Rogers, chairman, president, and CEO, Duke Energy

Felix G. Rohatyn, former U.S. Ambassador to France

Charles O. Rossotti, former United States Commissioner of Internal Revenue; co-founder and former chairman and CEO, American Management Systems

Judith Samuelson, executive director, The Aspen Institute Business & Society Program

Henry Schacht, former CEO, Cummins and Lucent Technologies

Lynn A. Stout, Paul Hastings Professor of Corporate and Securities Law, UCLA School of Law

Richard L. Trumka, secretary-treasurer, AFL-CIO

John C. Whitehead, former chairman, Goldman Sachs

John C. Wilcox, chairman, Sodali and former head of corporate governance, TIAA-CREF

Ash Williams, executive director and CIO, Florida State Board of Administration

James D. Wolfensohn, ninth president, World Bank Group

Before we question our system’s foundation, let’s review the historical record.

Advocates, including our most famous living free marketeer, former Fed chairman Alan Greenspan, celebrate Adam Smith as the founder of free market economics. But there is another, lesser-known side to the great Scottish thinker, which economist Herbert Stein wrote about: “He was not pure or doctrinaire about this idea. He viewed government intervention in the market with great skepticism…yet he was prepared to accept or propose qualifications to that policy in the specific cases where he judged that their net effect would be beneficial. He did not wear the Adam Smith necktie.”

Smith’s magnum opus, The Wealth of Nations, famously illustrated that the free market is guided to produce the right amount and variety of goods by a so-called “invisible hand.” But it is in his lesser-known work, The Theory of Moral Sentiments, where Smith proposes that it is the act of observing others that makes people aware of themselves and the morality of their own behavior.

In other words, capitalism requires a moral foundation to work its true magic. If we carelessly violate this boundary, we will indeed be subject to blame.

“Do unto others,” may not be the most sophisticated chapter in the Capitalist’s manifesto, but it makes for a very good beginning.

Boardroom Dynamo
Recently, I had the pleasure of interviewing Ira Millstein, senior partner of Weil, Gotshal & Manges, on the subject of how the boardroom needs to respond to the current crisis.

Ira’s world is the boardroom. His take on the current environment signals a sea change in the way the corporation and government will work together. While the immediate declaration of cooperation is a good thing, longer term we need to adapt a new set of governing principles or we may set into motion a system of corporate welfare and obeisance to legislated behavior that could permanently damage our ability to innovate and compete. Ira’s prescription: restore trust and accountability. Where to start? Compensation. How to begin? Separate the chief from the chair.

For more from Millstein on regulatory reform and other issues, see “A New Agenda.” We would do well to listen.

One Simple Way: Prevention is Preferable to a Cure
Overheard at the KPMG International Audit Committee Issues Conference from Henry Keizer, vice chair—audit of KPMG LLP:

“There is a real opportunity from my perspective for audit committee directors to set the right tone and be constructive in dealing directly and candidly with the CEO and the C-suite, so make sure you leverage it. Seize the challenging times by being a force for clarity and diligence in the boardroom. When the C-suite has their helmets on, they are down in the trenches and the team or the individuals may not have examined the issue that may now appear as only a distraction but later turns out to be critically important. Clarity, candor, and directness are the necessary ingredients to understanding and then influencing what goes on in the boardroom. So be confident…it’s enormously powerful. It’s all right to engage, even if it results in a tough board meeting, but one that was fair and robust and that no one walked out on. To me, if there’s one simple takeaway, it’s that—engage.”

In the face of the current financial crisis, Millstein has been at the forefront, calling for boards to take greater responsibility and improve oversight of risk management. He recently delivered the keynote address at the KPMG Audit Committee Issues Conference, presented in association with the National Association of Corporate Directors and Weil Gotshal. His message was clear: Directors need to restore trust and reset their goals. What follows is an excerpt from Millstein’s speech. The full text can be found at www.directorship.com/millstein.

I’ve had the good luck to have lived through the Great Depression and every recession since, and I’m still here, which is the good news. However, the depression of the 1930s had a lasting impact on my attitude toward life and times. I don’t suppose any of us who lived through it ever fully recovered enough not to worry about money, jobs, and all the rest, no matter how we otherwise made out in life.

This particular crisis bears a resemblance—but only a resemblance— to the 1930s. Really, in my opinion it’s nothing like it and won’t be. Furthermore, I am confident that the lasting effect this time will be positive, not negative. Watching my grandchildren and their attitudes, I see them fully capable of resetting their goals in a very positive way. I think they will see the world as one in which real values are more important than the values we created in the 1980s and 1990s. So, I’m confident about the future, despite what follows in this speech.

The first thing we must do is restore trust in the system. This requires a new approach to proposed government regulation once the need for emergency responses subsides. Future regulation should be based on an analysis of its costs and benefits in terms of economic impact. In addition to regulatory reform, we need to take a hard look at how the private sector governs itself. To earn trust, both analysis and reform demand total transparency to convince the public at large that regulation and governance are designed to benefit the “real economy,” not Washington or the executive suite.

The second theme is “resetting” the goal of these public and private efforts. The goal cannot be to get back to where we were in 2007! The public at large won’t accept that—the financial “anything goes” attitude of 2007 led us to where we are now. Rather, as President Obama has stated, the goal has to be to provide jobs and put people to work. This is our immediate goal; it can evolve and shift later, but this is our guiding principle now. We should focus pragmatically, not ideologically, on what actions will best allocate capital for the creation of real jobs. This is a far better objective than ideologically, and perhaps almost mindlessly, bolstering financial institutions by relying on economic models that are no longer applicable.

Most importantly, I heard in Obama’s acceptance speech what [columnist] David Brooks labeled the “politics of cohesion”: a new personal and mutual responsibility and unity, supporting pragmatism. This will indeed accomplish our goal over time if, and only if, across the entire private sector institutions and individuals alike reset goals and values. For the private sector, specifically the corporates, it means fulfilling their responsibilities to society at large, as well as to their shareholders and stakeholders.

Resetting the Goal
When we begin the process of careful regulation and governance reform, we have a reset goal: facilitate the flow of capital in a way that creates jobs in those industries which together will productively and efficiently employ the most Americans. The goal can be met by a variety of initiatives, but each initiative will need to be examined with that goal in mind.

Furthermore, in assessing the economic impact of proposed regulations and private initiatives, we must make strategic choices for the economy as a whole, between innovative and lightly regulated financial markets and the stable and heavily regulated market of the post-depression period. The right balance is one that creates the most jobs and stimulates economic growth in the long term. Directors and management are in a position to play an important role in reining in over-zealous attempts to constrain the financial industry and in assessing how much is too much.

Our situation is undoubtedly precarious and will continue to be for an indeterminate time. The banking sector is apparently imploding as we speak. Indeed, some wise heads see nationalization looming. What will that do to our market model?

Where and when does it stabilize? Not clear. So we are faced with the need to legislate, regulate, and modify behavior in an imploded capital market. The almost knee-jerk past response was to “fix” the capital market, using outmoded models, and without careful concern for the negative consequences: In good faith perhaps, but too much, and exclusively, government-think. And the negative consequences have landed on President Obama’s desk.

We didn’t have reliable economics or financial engineering on which to base our actions. Lehman and the Troubled Assets Relief Program, for example, may have been good-faith efforts to impact capital-market institutions and market behavior based on theories (and models) which then demonstrably didn’t work—and indeed, backfired. As a noted modeler recently pointed out, “…many of the predictive models taught in the classroom—models that fueled the financial industry’s boom and eventual bust—simply no longer work…They are all broken.”

So we go to work on all of this in a period of “pedagogical improvisation.” As FDR once did, we may have to use buckshot, since we have no reliable silver bullet to fix all this. And we need to be ever mindful that our task is not just U.S.-centric—the world is watching and doing its own thing.

This, then, is the context in which we all go to work in the future to regulate and self improve: uncharted territory, a broken compass, and only a North Star—people and jobs—to go by.

Where Do We Go From Here?
How exactly do we accomplish the reset goal? What are the new models now that it seems existing financial-capital market models are broken? In early January, hundreds of economists attended the annual meeting of the American Economic Association and, as a group, agreed that a profound shift has occurred. Why the shift in thinking? Because economic models are built on the assumption that people act rationally. However, irrational behavior appears to have played a significant part in the financial crisis. Maybe we start at the beginning with Adam Smith—not with The Wealth of Nations, but with The Theory of Moral Sentiments. Even Adam Smith’s world of competition and maximizing self-interest may not suffice, because the market does not exist in a world made up of people of prudence, of self-control, and beneficence.

So as academics, economists, theorists, and philosophers go back to their “pedagogical improvisation” and attempt to construct viable models, I suggest that, for now, we use President Obama’s pragmatic goal and mutually responsible approach as the guiding principle: What can the government and the private sector do to allocate capital away from the self-enrichment of special sectors and toward the production of goods and services for the creation of jobs? We should insist that such a test be applied. It may turn out not to be simple in application, but it’s a place to start each analysis.

The guideline, then, for future legislation and regulation: Does it serve the national interest in making capital transparently and fairly available to enterprises that create jobs in America?

We can no longer allow financial engineering, as important to the functioning of the market as it certainly is, to continue to be the tail wagging the dog of the real world of producing the goods and services which provide the jobs and economic growth vital to the whole world’s well-being.

Dysfunctional capital markets, which had a life of their own and became an end in themselves—rather than an instrument of solid economic development and job creation—are at the heart of this crisis. It is therefore critical that any and all responses to this crisis revert to the recognition that capital markets should be treated as an instrument, but only an instrument, to restore trust and promote real economic growth.

Cost/Benefit Analysis
It is too soon to tell the exact shape that the forthcoming regulatory overhaul will take. A crisis of this magnitude would not have been possible without a combination of multiple flaws in the regulation and deregulation of our financial system—and it will take some time to design effective remedies. Such remedies necessitate a set of strategic choices regarding where along the spectrum— between innovative, lightly regulated financial markets susceptible to crisis, and more stable, heavily regulated financial markets—is the optimum?

There will be many people pushing for a stripped-down sort of financial sector not given the freedom to create the next paper economy or shadow-banking industry that may prove inefficient in the long term. Indeed, some groups seem to suggest a return to old-fashioned commercial banking—taking deposits and lending to business, industry, and homeowners, on a closely regulated basis. However, there is another view—that innovation and risk-taking are a source of wealth and should not be stifled. But with such innovation and risk, and consequent potential instability, you need trust, trust that financial activities will support social productivity and the creation of jobs. How do we go about balancing and designing the right kinds of regulation that restore trust? How can we know that any governmental proposal satisfies its requirements? The customary message of our recent past—“because I’m telling you so” or “because disaster will otherwise ensue”—will not do for long-term solutions.

There is an old-fashioned way. Any future proposal for regulatory reform or governmental assistance should undergo a rigorous cost-benefit analysis in terms of economic impact, one that carefully weighs the expected benefits to the goal of growth and job creation against expected costs, potential risks, and negative market impact—all factors in assessing the economic impact— before it is adopted. Moreover, the main considerations involved in this  analysis should not be the exclusive province of government bureaucrats; transparency to the private sector and the public at large is essential. With participation by the private sector, only proposals which pass this stringent and transparent economic impact analysis should be allowed to go forward.

This is hardly a revolutionary suggestion. As long ago as 1979, an American Bar Association Commission published a scholarly report titled, “Federal Regulation—Road to Reform.” Its theme, just as applicable today, is that regulation should not be undertaken without adequate analysis and evaluation of its impact—an analysis that must have participation by impacted parties. Corporate leadership must step into the gap left by failing or teetering institutions and speak up to ensure that we don’t over-regulate and that our public and private reform efforts are supporting the production of goods and services and the creation of jobs.

What Regulation Makes a Difference?
As Obama and his economic team go about crafting legislation and designing specific regulations, it seems their efforts are being guided by what is known as the “Group of 30 Report,” which provides suggested guidelines for regulating the financial industry (including those industries, like private equity and hedge funds, that have historically, at least in part, been unregulated). The Group of 30 is a not-for-profit body of senior representatives from government and the private sector. Larry Summers, the head of the White House’s National Economic Council, is said to be preparing a blueprint of proposed regulatory changes to the financial industry, which will in large part be based on the Group of 30 Report.

Now, let’s turn to a few specific proposals and apply a simple test: let’s ask ourselves whether proposed regulation encourages the allocation of capital in a way that creates jobs. What follows are off-the-top- of-my-head examples—for which others may have different reactions. But that’s where analysis comes in.

REGULATORY REORGANIZATION: Greater coordination or some form of financial oversight reorganization by and among the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Federal Reserve, and other federal agencies.

• It looks efficient , but will it result in a more appropriate allocation of capital? Perhaps one hand at the tiller is too much central control and not enough room for competing ideas.

• Will some form of bank nationalization change the whole equation? How?

EXECUTIVE PAY: President Obama has called Wall Street bonuses “shameful” after a report found that financial executives received an estimated $18.4 billion in bonuses in 2008.

• Limits on executive pay in the financial industry will encourage a flow of highly skilled labor out of that sector and into those sectors that produce jobs, or into regulatory or enforcement positions that will help regulation and oversight keep pace with the inevitable innovation that always finds the gaps in regulation.

CREDIT RATING AGENCY REFORM: High on SEC Chairman Mary Schapiro’s list?

• Having SEC examiners at credit rating agencies, or lifting the near-monopoly created by the SEC’s Nationally Recognized Statistical Rating Organization (NRSRO) designation, or creating something akin to the Public Company Accounting Oversight Board (PCAOB) to oversee the credit-rating agencies.

• Will this help allocate capital more efficiently? Maybe by ridding the credit rating business from perceived conflicts, there possibly will be more candid assessments of risk, and capital would flow to the most efficient uses. But are the “solutions” simply theoretical and not practical? Are there downsides? HEDGE FUND REGULATION: Another item on Schapiro’s to-do list.

• Insisting on hedge fund registration would provide great transparency around hedge funds and the size and nature of their investments. This may help the allocation of capital to its most productive uses, but what risks does it present to the system in general?

• Other proposals include regulation of short selling (including more aggressive enforcement of rules against naked short selling, public disclosure of short positions, reinstatement of the “uptick rule,” and prohibitions on short selling). Are these just facial cleanups and how do they impact capital flows to enterprises that create real jobs?

RISK-BASED CAPITAL REQUIREMENTS: Yes, probably. Capital requirements encourage creditors to do business with financial institutions, by giving them protection, which, in turn, gives financial institutions additional capital to invest in productive ways. What are the downsides to job creation?

THE GLASS-STEAGALL ACT: Should this and other barriers between commercial banks and other investment-banking services be reinstated?

• By removing incentives to act in the interest of themselves and the generation of business and bonuses, banks might allocate capital to its most productive use. Perhaps this is already underway, but has it been thought through on an economic-impact analysis? Again, does some form of bank nationalization change this equation?

FINANCIAL REPORTING: In an article titled, “How to Restore Trust in Wall Street,” former SEC chairman Arthur Levitt and former SEC accountant Lynn Turner described the need for improving the quality, accuracy, and relevance of financial reporting in the effort to restore trust. In defending fair-value accounting as making the risk profile of an institution more transparent, the authors argued, “[W]e should be pointing fingers at those at Lehman Brothers, AIG, Fannie Mae, Freddie Mac, and other institutions who made poor investment and strategic decisions and took on dangerous risks. Blame should not be placed on the

process by which the market learned about them.” Are they right?

INTERNATIONAL FINANCIAL REPORTING STANDARDS: Shift global regulators, including the SEC, to a single set of accounting standards. A uniform set of accounting rules seems to promote the efficient flow of capital internationally and further enhance financial- market coordination. But which standard encourages appropriate capital allocations, and which might cloak it?

These are just a few of the proposals on the table. It’s my goal to seek a formal and rigorous economic-impact analysis as to whether each regulatory reform seeks to reset the capital markets to facilitate the flow of capital to the real economy, to well-performing enterprises that create jobs and economic growth; abjures a self-enriching financial system; and does not have serious adverse consequences.

We have a long way to go to financial recovery, but we know economic growth depends on trust in the functioning of the capital market and in the people responsible for running financial institutions and our productive corporations. We know the government and private sector have important roles to play in our economic recovery.

The private sector, along with public regulators and lawmakers, must insist that government action is aimed at resetting the capital markets to their original purpose—to facilitate the flow of capital to corporations that create economic value in the long-term and provide jobs. Every rule, new and old, must be examined and tested to ensure that it serves the national interest in making capital transparently and fairly available to enterprises that create jobs in America.

Moreover, the private sector is uniquely positioned to restore trust in the capital markets. It is at the very place regulation ends that individuals are asked to make discretionary decisions about the use of capital in the interest of their beneficiaries. It’s here in the gray areas that self-regulation and prudent corporate-governance practices are absolutely necessary. It’s in the boardroom that independent oversight is necessary, especially in the area of risk management, to instill market confidence.

The Recurrent Crisis Recurs

Boards and shareholders have ducked on compensation
Our individual savings generate the entire capital market, either through direct investment in public corporations, or indirectly through intermediaries such as pension funds, IRAs, mutual funds, savings banks, investment banks, insurance companies, and the like. Indeed, the government itself is an intermediary as it redistributes our taxes as the source of the recovery program. All intermediaries are dealing as fiduciaries for other people’s money, ultimately—ours. No matter how long the ownership chain, we are still the principals.

Together “we,” the whole investment chain, are the owners of corporate America and we should act like it. “We” have ducked our responsibility to halt compensation excesses in the financial sector and, to a certain extent, sections of the rest of corporate America. Now that compensation has come front and center in the wake of a crisis which has not only exposed its flaws, but did so on national network television, activation is essential. Not just because compensation at excessive levels is unacceptable to most of the beneficiaries—us—(which is reason enough), but because compensation is a politically attractive ground for regulation.

We should act now to re-establish the public trust in business and our enterprises. If we do not, we will face a regulatory response that can never accommodate all the unique individual circumstances of every company and industry. I believe any regulation will be so “swiss cheesed” in content, or by innovative interpretation, as to be ultimately ephemeral and ineffective.

But unless we act swiftly, history teaches that regulation seems inevitable given the public anger at excessive compensation. This is not just because it is a part of the economic downturn, but because it is the part the public understands best.

There seems to be a natural recurrent cycle for corporate governance crises: crisis, regulation; another crisis, more regulation; yet another crisis, and still more regulation. Today’s crisis involves the one issue the public is in total agreement about—excessive executive compensation. Naturally, regulation is hovering.

The regulation which has followed each crisis could have been avoided: Boards of directors would have needed to be attuned to, or at least just aware of, the temper of the times and perhaps, simply, a common sense of right and wrong.

Examples abound, but I will mention just two. The Foreign Corrupt Practices Act of 1977 was enacted following an SEC investigation and subsequent public disclosures of bribery. Was a statute carrying criminal penalties needed to convince boards that bribing was not an acceptable method of doing business? More recently, the regulatory response to crisis included passage of the Sarbanes-Oxley Act in 2002, an event which is particularly painful to me. Just a few years before Enron, John Whitehead and I chaired a Blue Ribbon Committee on “Improving the Effectiveness of Corporate Audit Committees.” The Committee unanimously recommended improvements in audit committee practices to reform the growing bookkeeping gyrations that were in use at the time. The recommendations were not generally adopted. Then came Enron and the congressional hearings that ensued. What began as our suggested voluntary practices quickly became legislated “musts” for board audit committees.

And here we are again. Who didn’t know that compensation practices had grown out of hand? Certainly the public did and complained, to no avail, as did a number of major shareholders often derided as “activist” troublemakers who were essentially ignored. Meanwhile, all forms of compensation in and beyond the financial sector continued to grow, as did the distance in compensation between executive management and the factory floor.

Why did so many boards fail to respond? Principally because, I believe, they chose to be tone deaf and paid little attention to the too-quiet voice of shareholders. Instead, they were complicit, relying on the easy “everyone else is doing it” excuse during the high-flying era, which has just collapsed.

Now the new crisis, and the bonus practices of some top-drawer bankers have brought in a troubled President ready to act on our behalf. The President, quite understandably, set forth new regulation containing direct-compensation caps and related restrictions for bailed-out corporations.

Moving forward, it would be useful for us to remember that the end of the ownership chain is the board of directors, the ultimate fiduciary for shareholders of every stripe. Compensation has always been the board’s responsibility. If they cease to be tone deaf, boards across the corporate spectrum will pick up the challenge and voluntarily bring compensation back to earth, before Congress, which isn’t tone deaf on this issue, moves in with broader “reforms.”

What will it take to develop a spine in the boardroom on the compensation issue? First and foremost, pressure from the institutions that represent all of us as their beneficiaries. Those institutions, individually and as a group, generally own enough stock, directly or indirectly, to be “heard” by their investees. And we, the provider of savings to the institutions, have the voice and legs to encourage them to be heard.

Communication with boards is available to the institutions informally and through more formal means such as proxy resolutions. Majority voting is available to shareholders of many corporations to remove compensation committee members. Public bullhorns are effective. A nudge from government may come in legislated rights for shareholders to have a “say on pay” which I believe is useful, but not critical, for those institutions that seriously want to communicate with a board. Those institutions need not await legislated “access” to place their own directors on a board, if they are serious about protecting us, their beneficiaries, rather than the boards and managements of their investees.

We know that all shareholders and taxpayers have the voice to act on compensation now.

Do they have the will?

Ira M. Millstein is the senior associate dean for corporate governance at the Yale School of Management, and senior partner, Weil, Gotshal & Manges. He is a member of the board of the National Association of Corporate Directors and has lectured and written extensively on corporate governance.

Together “we”, the whole investment chain, are the owners of corporate America and we should act like it. “We” have ducked our responsibility to halt compensation excesses in the financial sector and, to a certain extent, sections of the rest of corporate America. Now that compensation has come front and center in the wake of a crisis which has not only exposed its flaws, but did so on national network television, activation is essential. Not just because compensation at excessive levels is unacceptable to most of the beneficiaries—us—(which is reason enough), but because compensation is a politically attractive ground for regulation.

We should act now to re-establish the public trust in business and our enterprises. If we do not, we will face a regulatory response that can never accommodate all the unique individual circumstances of every company and industry. I believe any regulation will be so “swiss cheesed” in content, or by innovative interpretation, as to be ultimately ephemeral and ineffective.

“We” have ducked our responsibility to halt compensation excesses in the financial sector and, to a certain extent, sections of the rest of corporate America. Now that compensation has come front and center in the wake of a crisis which has not only exposed its flaws, but did so on national network television, activation is essential.

But unless we act swiftly, history teaches that regulation seems inevitable given the public anger at excessive compensation. This is not just because it is a part of the economic downturn, but because it is the part the public understands best.

There seems to be a natural recurrent cycle for corporate governance crises: crisis, regulation; another crisis, more regulation; yet another crisis, and still more regulation. Today’s crisis involves the one issue the public is in total agreement about, excessive executive compensation, so naturally, regulation is hovering.

The regulation which followed each crisis might have been avoided. Boards of directors would have needed to be attuned to, or at least just aware of, the temper of the times and perhaps, simply, a common sense of right and wrong.

Examples abound but I will just mention two. The Foreign Corrupt Practices Act of 1977 was enacted following an SEC investigation and subsequent public disclosures of bribery. Was a statute carrying criminal penalties needed to convince boards that bribing was not an acceptable method of doing business? More recently, the regulatory response to crisis included passage of the Sarbanes-Oxley Act in 2002, an event which is particularly painful to me. Just a few years before Enron, John Whitehead and I chaired a Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. The Committee unanimously recommended improvements in audit committee practices to reform the growing bookkeeping gyrations that were in use at the time. The recommendations were not generally adopted. Then came Enron et al. and the Congressional hearings that ensued. What began as our suggested voluntary practices quickly became legislated “musts” for board audit committees.

And here we are again. Who didn’t know that compensation practices had grown out of hand? Certainly the public did and complained, to no avail. As did a number of major shareholders often derided as “activist” troublemakers, but they were essentially ignored. Meanwhile all forms of compensation, in and beyond the financial sector, continued to grow, as did the distance in compensation between executive management and the factory floor.

Why did many boards fail to respond? Principally because, I believe, they chose to be tone deaf, and paid little attention to the too quiet voice of shareholders. Instead they were complicit, relying on the easy “everyone else is doing it” excuse during the high-flying era which has just collapsed.

Now the new crisis, and the bonus practices of some top-drawer bankers has brought in a troubled President ready to act on our behalf. The President, quite understandably, set forth new regulation containing direct compensation caps and related restrictions for bailed-out corporations.

Moving forward, it would be useful for us to remember the end of the ownership chain is the board of directors, the ultimate fiduciary for shareholders of every stripe. Compensation has always been the board’s responsibility. If they cease to be tone deaf, boards across the corporate spectrum will pick up the challenge and voluntarily bring compensation back to earth, before Congress, which isn’t tone deaf on this issue, moves in with broader “reforms.”

What may it take to drive spine into the board room on the compensation issue? First and foremost, pressure from the institutions that represent all of us as their beneficiaries. Those institutions, individually and as a group, generally own enough stock, directly or indirectly, to be “heard” by their investees. And we, the provider of savings to the institutions have the voice, and legs, to encourage them to be heard.

Communication with boards is available to the institutions through informal and more formal means such as proxy resolutions. Majority voting is available to shareholders of many corporations to remove compensation committee members. Public bull horns are effective. A nudge from government may come in legislated rights for shareholders to have a “say on pay” which I believe is useful, but not critical, for those institutions who seriously want to communicate with a Board. Those institutions need not await legislated “access” to place their own directors on a board, if they are serious about protecting us, their beneficiaries, rather than the boards and managements of their investees.

We know that all shareholders and taxpayers have the voice to act on compensation now.

Do they have the will?

Ira M. Millstein is the senior associate dean for corporategovernance at the Yale School of Management, and senior partner, Weil,Gotshal & Manges LLP. He is a member of the board of the National Association of Corporate Directors and has lectured and written extensively on corporate governance. 

The Millstein Center calls on institutional investors to be more transparent about the way they act as owners of public corporations by disclosing how they vote, what ownership policies they follow, and what resources they put into engagement efforts.

Fund recommendations and the code of conduct are among a number of improvements to proxy voting systems and decision-making outlined in the Millstein Center policy briefing Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry, which will be presented tomorrow at the International Corporate Governance Network mid-year meeting in Amsterdam.

“The economic crisis has highlighted as never before that the capital market’s health hinges on a reliable, open and efficient proxy voting system to keep corporate boards accountable,” said Ira M. Millstein, senior associate dean for corporate governance at the Yale School of Management. “The time has come for practical fixes.”

The briefing goes on to recommend that the U.S. Securities and Exchange Commission empanel an independent blue ribbon commission to modernize the U.S. share voting system; and that regulators should work with counterpart bodies in other markets to supervise the seamless integration of national systems to enable accurate and efficient cross-border voting.

Voting Integrity is based on independent research and insights from a roundtable of major U.S. and European institutional investors and proxy advisors convened by the Millstein Center on January 29, 2008 and chaired by Lynn Turner, former chief accountant to the SEC and former executive of Glass, Lewis & Co.

“These principles do not in any way undermine or negate further discussion, debate, and development of governance practices. We hope that the agreed principles will encourage boards, managers, and shareholders to eschew a check-the-box approach in favor of thoughtful governance, tailored by boards themselves to their particular circumstances and embraced by all stakeholders,” wrote NACD president and CEO Kenneth Daly in an introductory letter.

The principles, drafted pro bono by Ira Millstein and Holly Gregory and colleagues at Weil, Gotshal & Manges, are as follows:

1. Board responsibility for governance: Governance structures and practices should be designed by the board to position the board to fulfill its duties effectively and efficiently.

2. Corporate governance transparency: Governance structures and practices should be transparent— and transparency is more important than strictly following any particular set of best practice recommendations.

3. Director competency and commitment: Governance structures and practices should be designed to ensure the competency and commitment of directors.

4. Board accountability and objectivity: Governance structures and practices should be designed to ensure the accountability of the board to shareholders and the objectivity of board decisions.

5. Independent board leadership: Governance structures and practices should be designed to provide some form of leadership for the board distinct from management.

6. Integrity, ethics and responsibility: Governance structures and practices should be designed to promote an appropriate corporate culture of integrity, ethics, and corporate social responsibility.

7. Attention to information, agenda and strategy: Governance structures and practices should be designed to support the board in determining its own priorities, resultant agenda, and information needs and to assist the board in focusing on strategy (and associated risks).

8. Protection against board entrenchment: Governance structures and practices should encourage the board to refresh itself.

9. Shareholder input in director selection: Governance structures and practices should be designed to encourage meaningful shareholder involvement in the selection of directors.

10. Shareholder communications: Governance structures and practices should be designed to encourage communication with shareholders.

For a PDF of the NACD document, click here.

Harry Pearce, chairman of Nortel Networks, is the founding chair of the forum. Spencer Stuart, the director and executive search consulting firm, will co-sponsor the event aimed at allowing U.S. and Canadian chairmen to share experiences, test opportunities for collective action on market issues, and form the core of a global network of chairmen organizations.

An estimated 35 percent of S&P 500 corporations have moved to implement a separate chairman rather than combining the job with that of CEO. The Millstein Center predicts that upswing will continue. Washington Mutual and Citigroup recently elected to separate the two positions. Last week, shareholders at ExxonMobil voted strongly in favor of adopting the independent chair model.

Pearce said the inaugural forum will consider endorsing policy guidance on the role of an independent chair in North America. The statement is being drafted by Pearce and Ira M. Millstein, senior associate dean for corporate governance at the Yale School of Management and senior partner at Weil, Gotshal & Manges.

The Conference of Fund Leaders is a permanent body dedicated to peer collaboration among independent chairmen and lead directors of mutual funds. Stephen Davis, the project director, is also the editor of Global Proxy Watch, which is owned by Directorship.

“If corporations don’t begin to open up and discuss compensation, we’re going to get a ’say on pay’ law in the next administration,” Millstein advised corporate attorneys at the annual American Law Institute-American Bar Association conference on corporate governance. Say on pay, shareholder access which presumably would give long-term institutional investors additional influence in director elections, and majority voting policies are all likely to be acted on by a new presidential administration supported by the Democratically controlled Congress.

To thwart these restrictions before they can be legislated, Millstein urged companies to establish communication and election policies that help investors better participate in governance.

Board members have in many cases been reluctant to speak to investors because of Reg FD, a rule that requires an executive or director who discusses nonpublic material information with an investor to make a prompt public disclosure of that information. Millstein argued, however, that as long as the discussions focused on governance issues and not earnings-related subject matter, these conversations are imperative.

“Companies may worry that any executive or director who communicates, directly or indirectly, with a shareholder or group of shareholders could accidentally disclose material information, forcing the company to make a prompt public disclosure,” Millstein said. “Counsel should advise their clients that Reg FD is a caution, not a barricade. They should sit with the boards and design “shareholder communication” procedures tailored to suit the best interests of the company given its size, shareholder base, past governance issues and the like.”

Millstein added that executives and independent directors on boards must consider the widely divergent time horizons and investment objectives of investors in discussions with shareholders. He recommended that companies learn who their investors are, find out what issues they care about and send a lead director together with the company’s counsel to communicate with shareholders.

Holly J. Gregory and Ira Millstein of Weil,Gotshal & Manges this week announced the release of an annual memo by the firm thatidentifies areas for focus by corporate governance participants in the coming year.

In the memo, titled Rethinking Board and Shareholder Engagementin 2008, Millstein, Gregory, and colleague Rebecca C. Graspas, said they predict and encourage increased efforts by boardsto engage shareholders in less combative, more cooperative interaction andcommunication this year.

And while the firm says it supports shareholders’ intent torebalance corporate power, it cautions that “the forces for change should abateonce an appropriate balance is achieved, or a new imbalance will result.”

“Gone are the days when shareholders can broadly claim that boards areinactive, inattentive, and intractable or captives of management. The new reality is that boardsare already engaged in an unprecedented level of dialogue withshareholders, and many show real interest in finding ways to furthersuch communication.” — Memo from Weil, Gotshal & Manges

“Boards are well-advised to be open to shareholdercommunications on topics that bear on board quality and attention toshareholder value,” the memo explains, “communications that are likely toimprove mutual understanding and avoid needless confrontation.”

“Gone are the days when shareholders can broadly claim that boards areinactive, inattentive, and intractable or captives of management,” the memo continues. “The new reality is that boardsare already engaged in an unprecedented level of dialogue withshareholders, and many show real interest in finding ways to furthersuch communication.”

The notice comes not long after a similar year-ahead memo was released last month by Martin Lipton,co-founder of Wachtell, Lipton, Rosen & Katz. His note suggested that “limits on executivecompensation, splitting the role of chairman and CEO, and efforts to imposeshareholder referenda on maters that have been province of boards should beresisted.”

The recent memo by Weil, Gotshal and Manges urges more of an open dialogue with shareholders and a more balanced approach to corporate governance on the part of boards and investors.

Lipton also suggested that boards should resist the trend of“having the audit committee or a special committee of independent directorsinvestigate almost all whistle-blowing complaints, recognizing how disruptivesuch investigations are, and being judicious in deciding what really warrantsinvestigation.” (Lipton’s views on corporate governance were the topic of a recent Directorship cover-story. See “Bebchuk Vs. Lipton, December/January.)

Gregory says the Weil Gotshal memo, which is an annual exercise, is in no way intended as a response or a counterpoint to the Lipton memo. “Our piece is designed to focus directors on key issues for the coming year. Cleary this year our piece does reflect a view that is different than Marty’s. It’s the product of different experiences and philosophies about governance.”